sat-u-ra-tion (sāch’ə-rā’shən) - “The flooding of a market with all of a commodity that consumers can purchase.”

It was never hard to see why people clamored over the coffee. It was good, and more importantly it was consistent. The ambiance and general feel of the stores was unique, and yet easy to be attracted by the soft music and warm pictures. Overrun by an overzealous and greedy board of directors, Starbucks (SBUX) has transformed into just another average company.

Nowadays, consumers enjoy having a coffee place that’s right around the corner and worth the price. Unfortunately, Starbucks took the demand of the consumer a step to far, by over saturating the market with stores.

One of the best examples of over saturation can be found in a strip mall in Colorado. Exactly three Starbucks locations, marked by the red X’s can be found. Each store is no more than 750 ft away from one another, and two of the stores are only 200 ft away from each other. By flooding the market with spots for coffee, Starbucks has been wasting growth potential, and opting for current market optimization. Unfortunately, the optimization is becoming wasteful and hurting the brand image.

In a number of press releases, Howard Schultz, Chairman and Founder of Starbucks, has mentioned the loss of original roots associated with becoming a chain store. The focus on coffee shop ambiance was the root to Starbucks’ success, but somewhere along the line the company lost the entrepreneurial spirit.

On May 3rd, 2007, Starbucks announced an in-line quarter of 19 cents per share. Revenue increased 20 percent, while same-store sales climbed 4 percent.

“Looking ahead, the company said it plans to open about 2,400 new stores worldwide in fiscal 2007. In the U.S., Starbucks expects to open about 1,000 company-operated locations and 700 licensed locations. Starbucks said it is targeting total revenue growth of about 20% for the full year and same-store sales growth of 3% to 4%. The company continues to forecast earnings of 87 cents to 89 cents a share for fiscal 2007.” (SOURCE)

Obviously, both investors and the company felt confidant in the quarter and its numbers. Shares in SBUX promptly climbed 2.9 percent in after-hours trading that day.

The optimism quickly faded and the bull run disappeared, and now SBUX is down about 30 percent from the 52 week high of $40.01. In the past, shares have traded down just under $29 per share, and rallied up from support. Now, shares have broken through that support level and are now trading near the low-$28s. Shares may have entered a short-term oversold territory, but the relatively high P/E of 35x earnings are still dissuading investors from buying in now. Based upon price-to-earnings for the year 2008, Starbucks will still be trading at an expensive 26x earnings, but if shares continue to pullback, a purchase may be necessary. In the short-term, shares in SBUX should continue to pullback, but look to buy in at the low $20s.

Disclosure: No conflicts.

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This entry was posted on Thursday, May 17th, 2007 at 7:30 am and is filed under Starbucks (SBUX). You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.